International Business Machines ORDER ON CROSS ......2018/08/17 · International Business Machines...

STATE OF MINNESOTA

COUNTY OF RAMSEY

International Business Machines Corporation and Subsidiaries,

Appellants,

vs.

Commissioner of Revenue,

Appellee.

TAX COURT

REGULAR DIVISION

ORDER ON CROSS-MOTIONS FOR SUMMARY JUDGMENT

File No. 9053-R

Filed: August 17, 2018

This matter came before The Honorable Bradford S. Delapena, Chief Judge of the

Minnesota Tax Court, on the parties' cross-motions for summary judgment.

Walter A. Pickhardt, Faegre Baker Daniels LLP, represents appellants International

Business Machines Corporation and Subsidiaries.

Wendy S. Tien, Assistant Minnesota Attorney General, represents appellee Commissioner

of Revenue.

The parties dispute the computation of Appellants International Business Machines

Corporation and Subsidiaries' Minnesota Research and Development Credit (Minnesota R&D

Credit), authorized by Minn. Stat. § 290.068 (2010), for the tax year ended December 31, 2011.

We grant in part and deny in part each party's motion for summary judgment.

The court, upon all the files, records, and proceedings herein, now makes the following:

ORDER

1. Appellants International Business Machines Corporation and Subsidiaries ' motion

for summary judgment is granted in part and denied in part. Specifically, we agree with IBM that,

for the tax year in issue, the Minnesota "base amount" had to be computed using federal

(nationwide) gross receipts in the denominator of the fixed-base percentage. See infra § IV.B.

IBM's motion is denied in all other respects.

2. Appellee Commissioner of Revenue's motion for summary judgment is granted in

part and denied in part. Specifically, we agree with the Commissioner that, for the tax year in

issue, Minnesota law incorporated the federal minimum base amount provision as part of the

state-law definition of "base amount," and did not incorporate the federal election of alternative

simplified credit. See infra §§ IV.A, IV.C. The Commissioner's motion is denied in all other

respects.

3. Pursuant to the parties' stipulated computation, IBM's Minnesota R&D Credit for

the 2011 tax year is $2,378,713. 1

4. The Commissioner shall calculate the amount of the Minnesota R&D Credit

carryovers to the 2011 tax year,2 and shall file and serve that calculation no later than

September 21, 2018.

5. No later than ten days after service of the Commissioner's calculation, IBM may

file and serve objections.

6. No later than five days after service of IBM's objections, the Commissioner may

file and serve a response, if any.

7. IfIBM files no objection to the Commissioner's calculation, the court will promptly

file a final order for judgment. IfIBM does file objections, the court will determine the appropriate

carryovers, if any, and then file a final order for judgment.

1 See Stipulation of Facts ,i 33 (filed Jan. 10, 2018); Ex. J-7.

2 See Stip. ,i,i 40-41.

2

IT IS SO ORDERED.

DATED: August 17, 2018

BY THE COURT,

Bradfor . Delapena, Chief Judge MINNESOTA TAX COURT

MEMORANDUM

In 1981, hoping to stimulate domestic research and development activity, Congress

amended the Internal Revenue Code by creating a research and development tax credit (R&D

credit). Economic Recovery Act of 1981, Pub. L. No. 97-34, 95 Stat. 172. In 1982, the Minnesota

Legislature created a state R&D credit to stimulate research and development activities in

Minnesota. Act of Jan. 15, 1982, ch. 2, art 3, § 6, 1982 Minn. Laws 16, 87 (1981 3rd Sp. Sess.)

(codified at Minn. Stat. § 290.068 (1982)). This case involves the computation of Appellants

International Business Machines Corporation and Subsidiaries' 2011 Minnesota R&D Credit.

The 2011 version of the Minnesota R&D Credit, codified at Minn. Stat. § 290.068 (2010),

was based on its federal counterpart and incorporated concepts used in federal law, such as

"qualified research" and "base amount." By statute, however, the Legislature redefined those

terms for state-law purposes. Thus, the term "qualified research" under Minnesota law meant

"qualified research as defined in section 41 ( d) of the Internal Revenue Code, except that the term

does not include qualified research conducted outside the state of Minnesota." Minn. Stat.

§ 290.068, subd. 2(b) ( emphasis added). Specifically because the Legislature modified the

3

components used to compute the Federal R&D Credit, it was necessary to separately compute the

Minnesota credit.

This case involves two computational issues regarding the Minnesota R&D Credit. Each

turns on the degree to which Minnesota law (a) incorporated and (b) modified federal law. The

first issue is whether the definition of"base amount" that Minnesota incorporated from federal law

included a "minimum base amount" provision. IBM contends that Minnesota law did not

incorporate the federal minimum base amount provision;3 the Commissioner argues that it did.4

The parties have stipulated to the tax consequences for IBM of both alternatives.5

The second computational issue is whether Minnesota law modified for state-law purposes

the federal definition of "aggregate gross receipts." IBM contends that Minnesota did not modify

the definition;6 the Commissioner argues that it must have. 7 Again, the parties have stipulated to

the tax consequences of both alternatives. 8 The final issue is whether Minnesota incorporated a

federal provision allowing taxpayers to choose an alternative method for calculating the Federal

R&D Credit. 9 Each issue presents a question of statutory interpretation.

Before resolving the parties' dispute, we provide some background on the federal and state

R&D credits and set forth the pertinent historical and procedural facts, all of which are stipulated.

3 IBM's Mem. Supp. Summ. J. 11-20.

4 Comm'r's Mem. Supp. Summ. J. 12-16.

5 Stip. ,r,r 35-37; Ex. J-8.

6 IBM's Mem. Supp. Summ. J. 7-11.

7 Comm'r's Mem. Supp. Summ. J. 16-25.

8 Stip. ,r,r 32-34; Ex. J-7.

9 See IBM's Mem. Supp. Summ. J. 20-21; Comm'r's Mem. Supp. Summ. J. 25-28.

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I. BACKGROUND OF THE R&D CREDITS

Because the Minnesota R&D Credit was based on its federal counterpart, we begin with

the federal credit.

A. The Federal R&D Credit

In 1981, Congress enacted the first mcome tax credit for increasing research and

development activities above existing levels as part of the Economic Recovery Act of 1981.

Economic Recovery Act of 1981, Pub. L. No. 97-34, 95 Stat. 172. During 2011, the tax period in

issue, I.R.C. § 41, which codified the Federal R&D Credit, provided in part as follows:

(a) GENERAL RULE. [T]he research credit determined under this section for the taxable year shall be an amount equal to the sum of-

(1) 20 percent of the excess (if any) of-

(A) the qualified research expenses for the taxable year, over

(B) the base amount ....

I.R.C. § 4l(a)(l) (2006). 1° Federal law defined the two amounts to be compared in computing the

credit. See I.R.C. §§ 41(b) (defining "qualified research expenses"); 41(c) (defining "base

amount"). Computation of the federal credit can be represented as follows:

10 Although the subsection 41(a)(l) credit was but one component of a larger federal research credit, see generally I.R.C. § 41(a)(l)-(a)(3), Minnesota adopted only a subsection (a)(l) analog. Consequently, subsection (a)(l) is the only one relevant here.

5

8

7

6

5

4

3

2

1

0

Federal R&D Credit

Base Amount QRE

Base amount l!ll Excess above base amount

As this depiction suggests, the determination of federal base amount was consequential, because

it directly affected the amount of qualifying research expenses (QREs) subject to the twenty

percent credit.

The two computational issues in this case revolve around Minnesota's adoption and

modification of the federal "base amount." Federal law provided, in part:

(1) IN GENERAL. The term "base amount" means the product of

(A) the fixed-base percentage, and

(B) the average annual gross receipts of the taxpayer for the 4 taxable years preceding the taxable year for which the credit is being determined .. ..

I.R.C. § 41(c)(l) (2006). The "fixed-base percentage" necessary for this computation was "the

percentage which the aggregate qualified research expenses of the taxpayer for taxable years

[1984-88] is of the aggregate gross receipts of the taxpayer for such taxable years." I.R.C.

§ 41(c)(3) (2006). Generally, then, a taxpayer' s federal "base amount" was computed using the

following formula:

(Aggregate OREs 1984-88) (Aggregate gross receipts 1984-88)

X (Average annual gross receipts for the four years preceding the taxable year)

As this equation reveals, Congress selected the period 1984 through 1988 as a reference

period. A taxpayer' s federal "base amount" as computed using this formula could not be less than

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fifty percent of its "qualified research expenses" for the credit year. See I.R.C. § 41 ( c )(2) (2006)

(minimum base amount).

B. The Minnesota Credit

To stimulate research and development m Minnesota, the Legislature adopted the

Minnesota R&D Credit in 1981. Act of Jan. 15, 1982, ch. 2, art 3, § 6, 1982 Minn. Laws 16, 87

(1981 3rd Sp. Sess.)(codified at Minn. Stat. § 290.068 (1982)). During 2011, Minn. Stat. §

290.068, provided in pertinent part as follows:

Subdivision 1. Credit allowed. A corporation ... [is] allowed a credit against the tax computed under this chapter for the taxable year equal to:

(a) ten percent of the first $2,000,000 of the excess (if any) of

(1) the qualified research expenses for the taxable year, over

(2) the base amount; and

(b) 2.5 percent on all of such excess expenses over $2,000,000.

Minn. Stat.§ 290.068, subd. 1 (2010) (emphasis added). Computation of the Minnesota credit can

be represented as follows:

Minnesota R&D Credit

8

2.5%

6

4

2

0

Base Amount QRE

Base amount Ill First$ 2million over base amount Excess above first $2 million

As this depiction suggests, the determination of state base amount was also consequential.

Assuming $8 million in state QREs, for example, a base amount of $3 million would produce a

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state R&D credit of $275,000; 11 a base amount of $5 million, a credit of $225,000; 12 and a base

amount of$7 million, a credit of$100,000. 13 Thus, for a given quantity ofQREs, as base amount

increased, the credit decreased, and vice versa.

II. FACTS AND PROCEDURAL HISTORY

This matter is here on stipulated facts. Appellants International Business Machines

Corporation and Subsidiaries (IBM), are among the world's leading technology companies. 14

Although incorporated in New York, IBM engages in significant research and development

activities at its facility in Rochester, Minnesota. 15 IBM timely filed a 2011 Minnesota corporate

franchise tax return16 claiming a $322,881 Minnesota R&D Credit. 17

In October 2013, after an audit, the Commissioner issued a Notice of Change in Tax,

reducing IBM's 2011 Minnesota R&D Credit to $313,195. 18 On April 15, 2016, IBM filed an

amended return, claiming a 2011 state R&D credit of $4,395,399 (exclusive of carryovers), and

requesting a refund. 19 The Commissioner denied IBM' s refund request in March 2017. 20 IBM

timely filed a Notice of Appeal with this court on May 8, 2017. 21 On January 10, 2018, IBM and

I I ($2,000,000 X 0.1) + ($3,000,000 X 0.025) = $275,000.

12 ($2,000,000 X 0.1) + ($1 ,000,000 X 0.025) = $225,000.

13 ($1,000,000 X 0.1) = $100,000.

14 Stip. iJ 2.

15 Stip. ,i,i 1-2.

16 Stip. iJ 3; Ex. J-2.

17 Stip. ,i 4; Ex. J-2, at 42.

18 Stip. ,i,i 5-6; Ex. J-3, at 120.

19 Stip. ,i 24; Ex. J-5 , at 124-25.

20 Stip. iJ 24; Ex. J-1.

21 Not. Appeal (filed May 8, 2017).

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the Commissioner filed cross-motions for summary judgment.22 For purposes of oral argument

only, this case was consolidated with another that raises similar issues, General Mills, Inc. v.

Commissioner of Revenue, No. 9016-R (filed Feb. 2, 2017).23

III. GOVERNING PRINCIPLES

A. Summary Judgment Standard

Summary judgment shall be rendered if the pleadings, the record in the case, and any

supporting affidavits show that there is no genuine issue as to any material fact and that a party is

entitled to judgment as a matter of law. Minn. R. Civ. P. 56.03; DLH, Inc. v. Russ, 566 N.W.2d

60, 69 (Minn. 1997). When parties file cross-motions for summary judgment, they tacitly agree

that there are no genuine issues of material fact. Am. Family Mut. Ins. Co. v. Thiem, 503 N.W.2d

789, 790 (Minn. 1993). Thus, summary judgment is a suitable vehicle for addressing the

application oflaw to undisputed facts. See A. J Chromy Constr. Co. v. Commercial Mech. Serv.,

Inc., 260 N.W.2d 579, 581 (Minn. 1977).

B. Statutory Interpretation

"The object of all interpretation and construction of laws is to ascertain and effectuate the

intention of the legislature." Minn. Stat. § 645 .16 (2016). Legislative intent is determined

"primarily from the language of the statute itself." Brayton v. Pawlenty, 781 N.W.2d 357, 363

(Minn. 2010) (quoting Gleason v. Geary, 214 Minn. 499,516, 8 N.W.2d 808,816 (1943)). Courts

use statutory canons of interpretation to determine a statute's meaning. Laase v. 2007 Chevrolet

Tahoe, 776 N.W.2d 431, 435 (Minn. 2009). Under pertinent canons, "words and phrases are

construed according to rules of grammar and according to their common and approved usage; but

22 IBM's Not. Mot. & Mot. Summ. J. (filed Jan. 10, 2018); Comm'r Not. Mot. & Mot. Summ. J. (filed Jan 10, 2018).

23 Tr. 3-6.

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technical words and phrases and such others as have acquired a special meaning ... are construed

according to such special meaning or their definition." Minn. Stat.§ 645.08(1) (2016).

IV. ANALYSIS

The first two issues in this case involve the proper computation of the Minnesota base

amount. The third issue is whether Minnesota incorporated a federal provision allowing taxpayers

to choose an alternative method for calculating the Minnesota R&D Credit.

A. Minimum Base Amount

The first issue is whether the definition of "base amount" Minnesota incorporated from

federal law included the "minimum base amount" limitation. IBM contends that Minnesota law

did not incorporate the federal minimum base amount provision, 24 whereas the Commissioner

argues that it did. 25 The parties have stipulated to the tax consequences for IBM of both

alternatives.

Because this issue raises a question of statutory interpretation, we set forth the text of the

controlling state and federal statutes for tax year 2011. Minnesota Statutes section 290.068

provided in pertinent part:

Subd. 2. Definitions. For purposes of this section, the following terms have the meanings given.

( c) "Base amount" means base amount as defined in section 41 ( c) of the Internal Revenue Code, except that ....

Minn. Stat. § 290.068, subd. 2(c) (2010). Section 41(c) of the Internal Revenue Code provided in

pertinent part:

( c) Base Amount

24 IBM's Mem. Supp. Summ. J. 11-20; Tr. 7-9.

25 Comm' r's Mem. Supp. Summ. J. 12-16; Tr. 38-40.

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(B) the average annual gross receipts of the taxpayer for the 4 taxable years preceding the taxable year for which the credit is being determined (hereinafter in this subsection referred to as the "credit year").

(2) MINIMUM BASE AMOUNT. In no event shall the base amount be less than 50 percent of the qualified research expenses for the credit year.

(3) FIXED-BASE PERCENTAGE.

(A) IN GENERAL. Except as otherwise provided in this paragraph, the fixed-base percentage is the percentage which the aggregate qualified research expenses of the taxpayer for taxable years beginning after December 31 , 1983, and before January 1, 1989, is of the aggregate gross receipts of the taxpayer for such taxable years.

I.R.C. § 41(c)(l)-(c)(3)(A) (2006).

The critical language here is the portion of Minn. Stat. § 290.068, subd. 2( c ), providing

that "base amount" for purposes of the Minnesota R&D Credit "means base amount as defined in

section 4l(c) of the Internal Revenue Code." The determinative question is: Which provisions of

I.R.C. § 41(c) defined "base amount," and were therefore incorporated into Minnesota law?

The term "define" means: "(1) To state or explain explicitly. (2) To fix or establish

(boundaries or limits). (3) To set forth the meaning of (a word or phrase)." Define, Black 's Law

Dictionary (10th ed. 2014 ). Subsection ( c )(1) was surely part of section 41 ( c )' s definition of base

amount: it set forth the general meaning of that term as the product of "the fixed-base percentage"

and a specified gross receipts figure. The provisions of subsection ( c )(1) were therefore

incorporated into Minnesota law.

It is readily apparent that Minnesota law also incorporated the provISions of

subsection (c)(3). For that subsection explained "fixed-base percentage." Had this explanation

not been incorporated into state law, then "fixed-base percentage" would have had no state-law

meaning, and there would have been no state-law basis for computing the Minnesota "base

11

amount" under the incorporated provisions of subsection ( c )( 1 ). "[T]he legislature does not intend

a result that is ... impossible of execution .... " Minn. Stat.§ 645.17(1) (2016). Because subsection

(c)(l) was inherently incomplete, and could not stand alone as a definition of base amount (as the

Legislature surely recognized), we conclude that subsection (c)(3) was part of section 41(c)'s

definition of base amount, and that its provisions were incorporated into Minnesota law.

We now tum to the intervening provision, subsection (c)(2): "In no event shall the base

amount be less than 50 percent of the qualified research expenses for the credit year." I.R.C.

§ 41 ( c )(2). As previously indicated, the word "define" means, in part: "To fix or establish

(boundaries or limits)." Define, Black's Law Dictionary. Subsection (c)(2) performed precisely

this definitional function: it limited the general meaning of base amount to fifty percent or more

of qualified research expenses for the credit year. We therefore conclude that this subsection, too,

was part of section 41 ( c )' s definition of base amount, and that its provisions were incorporated

into Minnesota law.

None of the remaining subsections of section 41(c) defined base amount. Subsections (4),

(5), and (6), were titled, respectively, "Election of Alternative Incremental Credit," "Election of

Alternative Simplified Credit," and "Consistent Treatment of Expenses Required." See I.R.C.

§ 41(c)(4)-(c)(6).

We find unpersuasive IBM's several arguments that the federal minimum base amount

provision was not incorporated into Minnesota law. IBM first argues that "[t]he term 'define'

should be understood in accordance with its common usage, and it is commonly used 'to discover

or set forth the meaning of (something, such as a word).' " 26 On this basis, IBM argues that

26 IBM's Mem. Supp. Summ. J. 12 ( quoting Define, Merriam Webster's Collegiate Dictionary (11th ed. 2014)).

12

section 41 ( c )' s definition of base amount "begins and ends in subsection ( c )(1 ). " 27 This is just

cherry-picking, however, because the quoted definition further provides that "define" means, "to

fix or mark the limits of: DEMARCATE." Define, Merriam Webster's Collegiate Dictionary (11th

ed. 2014). As we indicate above, that is precisely the function subsection (c)(2) plays in section

41(c)'s overall definition of base amount.

Second, IBM argues that subsection (c)(2) cannot define base amount because it uses that

term.28 We disagree. Although subsection (c)(2) includes the term base amount, its mention of

that term is essential to the text' s definitional function: ensuring that "[i]n no event shall the base

amount be less than 50 percent of the qualified research expenses for the credit year." I.R.C.

§ 41(c)(2).29

IBM next argues that in Stanley Works v. Commissioner, the U.S. Tax Court "observed the

principle that a limitation placed on a previously defined term is not part of the definition of that

term." 30 As an initial matter, we doubt that the Stanley Works Court intended to announce a

general principle. In any event, Stanley Works rested on the court' s conclusion that "by its terms,"

the limiting provision in question "contained no language pertaining to the definition of' the

contested statutory term. Stanley Works , 87 T.C. at 419. Instead of pertaining to meaning, the

27 IBM's Mem. Supp. Summ. J. 13.


29 Discussing the legislative history of section 41 ( c ), IBM asserts that subsection ( c )(2) is a computation limit separate from the determination of base amount. IBM's Mem. Supp. Summ. J. 16-18. Because we conclude that subsection (c)(2)-by its plain meaning-is part of the definition of base amount, however, we do not consider legislative history, an extrinsic aid to construction.

30 IBM' s Mem. Supp. Summ. J. 14 (discussing Stanley Works v. Comm 'r, 87 T.C. 389,419 (1986)).

13

limiting provision affected the operation of the entire statute. Id. Here, we conclude that

subsection (c)(2) pertains directly to the meaning of base amount, by limiting that meaning.

Finally, IBM argues that if subsection ( c )(2) is incorporated into Minnesota law, then the

Minnesota R&D Credit "would be subject to two sets of limitations, reducing the credit's marginal

rate to just 1.25 percent." 31 IBM continues: "It is hard to believe that the Legislature intended

such a miserable, paltry credit for increasing Minnesota-based research activities." 32 Again we

disagree. As the examples set forth earlier demonstrate, changing the allowable base amount

certainly affects the amount of the credit for any given level of qualifying research expenses. See

supra § I.B. But adopting a base-amount limitation does not alter the statutory rates. Instead, it

potentially reduces the qualified research expenses subject to the stated rates. 33

We agree with the Commissioner that Minnesota law incorporated the federal minimum

base amount provision as part of the state-law definition of "base amount." Consequently, we

grant the Commissioner's motion for summary judgment on that issue.

B. Fixed-Base Percentage

The second issue also involves the computation of Minnesota base amount. Resolution of

this issue turns on the degree to which the Minnesota Legislature altered for state-law purposes

the two terms multiplied to compute federal base amount: (1) the fixed-base percentage, and

(2) "the average annual gross receipts of the taxpayer" for the four preceding years.



33 This point is perfectly illustrated by the parties' stipulated re-computation of IBM's Minnesota R&D Credit, which applies the minimum base amount limitation and nevertheless uses the stated statutory rates. Stip. ,i 33.

14

We agam set forth relevant federal provisions, emphasizing several terms on which

analysis must focus. During the time period in issue, I.R.C. § 41 provided, in part:

( c) Base Amount



(B) the average annual gross receipts of the taxpayer for the 4 taxable years preceding the taxable year for which the credit is being determined ... .

(3) FIXED-BASE PERCENTAGE.

(A) IN GENERAL. Except as otherwise provided in this paragraph, the fixed-base percentage is the percentage which the aggregate qualified research expenses of the taxpayer for taxable years [ 1984 through 1988] is of the aggregate gross receipts of the taxpayer for such taxable years.

I.R.C. § 41(c)(l), (c)(3) (emphasis added). Under these provisions, a taxpayer's federal "base

amount" was computed as follows:

(Aggregate OREs 1984-88) (Aggregate gross receipts 1984-88)

X (Average annual gross receipts for the four years preceding the taxable year)

The Minnesota Legislature adopted the federal base amount concept but, by furnishing

state-law definitions of critical terms, modified its computation for state-law purposes. During the

relevant time period, Minnesota law provided, in part:

Subd. 2. Definitions. For purposes of this section, the following terms have the meanings given.

(a) "Qualified research expenses" means (i) qualified research expenses and basic research payments as defined in section 41 (b) and ( e) of the Internal Revenue Code, except it does not include expenses incurred for qualified research or basic research conducted outside the state of Minnesota pursuant to section 41 ( d) and (e) ....

(b) "Qualified research" means qualified research as defined in section 41(d) of the Internal Revenue Code, except that the term does not include qualified research conducted outside the state of Minnesota.

( c) "Base amount" means base amount as defined in section 41 ( c) of the Internal Revenue Code, · except that the average annual gross receipts must be

15

calculated using Minnesota sales or receipts under section 290.191 and the definitions contained in clauses (a) and (b) shall apply.

Minn. Stat.§ 290.068, subd. 2(a)-(c). By its plain meaning, these provisions modified the formula

for computing base amount in two respects.

First, by providing state-law definitions of "qualified research" and "qualified research

expenses," subdivisions 2(a) and 2(b) altered the numerator of the "fixed-base percentage,"

limiting the "qualified research expenses" to be aggregated to those incurred in Minnesota.34

Second, by providing that "the average annual gross receipts must be calculated using Minnesota

sales or receipts," subdivision 2( c) limited the "average annual gross receipts" to be multiplied by

the fixed-base percentage. As a result of these modifications, a taxpayer's Minnesota "base

amount" was computed using the following formula:

(Aggregate Minn. OREs 1984-88) (Aggregate gross receipts 1984-88)

X (Average annual Minn. gross receipts for the four years preceding the taxable year)

In sum, by furnishing state-law definitions of particular federal terms, the Minnesota Legislature

statutorily modified two of the three terms in the equation for computing base amount.

The issue presented is whether the Minnesota Legislature also modified for state-law

purposes the denominator of the fixed-base percentage-whether it altered the definition of

"aggregate gross receipts" to refer exclusively to Minnesota gross receipts. IBM argues that it did

not and, consequently, that under the plain meaning of subdivision . 2( c ), the Minnesota base

amount must be "computed using federal [nationwide] gross receipts in the denominator." 35 The

Commissioner contends that "[fJor purposes of calculating the Minnesota R&D Credit, the

reference to 'aggregate gross receipts' in IRC Section 41 ( c )(3) means Minnesota aggregate gross

34 Under I.R.C. § 41 ( c )(3)(C), the maximum fixed-base percentage is sixteen percent. The parties agree that this provision applies to the Minnesota R&D Credit. Stip. ,r,r 17, 21.

35 IBM's Mem. Supp. Summ. J. 7-11; see Tr. 26-28.

16

receipts." 36 We conclude that the Commissioner's proposed interpretation is incompatible with

the text of Minn. Stat. § 290.068, subdivision 2(c), which directly supports IBM's contrary

position.

Federal law defined the three-word phrase "qualified research expenses." I.R.C. § 41(b).

The Minnesota Legislature redefined for state-law purposes the same three-word phrase, so as to

exclude from its ambit expenses for research "conducted outside the state of Minnesota." Minn.

Stat.§ 290.068, subd. 2(a). This modification altered the numerator of the "fixed-base percentage"

for state-law purposes by limiting the research expenses to be aggregated in the numerator.

Federal law used the four-word phrase "average annual gross receipts." I.R.C.

§ 41 ( c )(1 )(B). In defining "base amount" for state-law purposes, the Minnesota Legislature

limited the meaning of that same four-word phrase by providing: "[t]he average annual gross

receipts must be calculated using Minnesota sales or receipts . ... " Minn. Stat. § 290.068,

subd. 2( c) ( emphasis added). This directly modified the figure to be multiplied by the fixed-base

percentage.

In these respects, the text of Minn. Stat. § 290.068, subdivision 2, is unambiguous, and

indicates the Legislature' s intent to modify for state-law purposes two particular terms used in

federal law. Brayton, 781 N.W.2d at 363 ("We determine legislative intent primarily from the

language of the statute itself." (internal quotation marks and citation omitted)).

Federal law used the three-word phrase "aggregate gross receipts" to specify the

denominator of the fixed-base percentage. I.R.C. § 41(c)(3)(A). We have already concluded that

subsection (c)(3)(A) was incorporated into Minnesota law as part of the federal definition of "base

36 Comm'r' s Mem. Supp. Summ. J. 16 (emphasis added); see Tr. 57-59.

17

amount." See supra§ IV.A. The question is whether the Minnesota Legislature modified the term

"aggregate gross receipts."

That term did not appear in Minn. Stat. § 290.068: the Legislature neither used the term

"aggregate gross receipts" nor redefined it. Particularly in light of statutory text modifying other

federal terms, the absence of any use or redefinition of "aggregate gross receipts" in state law

indicates that the Legislature did not intend to modify that term for state-law purposes. Because

the term "aggregate gross receipts" was incorporated into state law, but was not modified by state

law, it had the same meaning for state-law purposes as it had for federal purposes. Here, again,

state law is clear and unambiguous. 37

The Commissioner's textual arguments that "aggregate gross receipts" means only

Minnesota gross receipts are unpersuasive. The Commissioner argues that "[t]he Minnesota

limitation on 'gross receipts' in [Minn. Stat. § 290.068, subd. 2(c)] plainly was intended to apply

to average aggregate gross receipts described in IRC section 4l(c)(l)(A) .. .. " 38 On this basis, the

Commissioner argues: "If the term 'average ... gross receipts' were to refer to Minnesota sales or

receipts in the context of average annual gross receipts, but to nationwide sales or receipts in the

context of average aggregate gross receipts, such a conflicting use of the term would be

disfavored." 39 There are at least three problems with this reasoning.

37 Because we conclude that Minn. Stat. § 290.068 is unambiguous in this respect as well, we do not consider administrative or legislative interpretations. See Hutchinson Tech. , Inc. v. Comm 'r of Revenue, 698 N.W.2d 1, 14 (Minn. 2005) (noting that courts "look to legislative and administrative interpretations of a statute [only] when the words of the law are not explicit") (citing Minn. Stat.§ 645.16 (2004)).

38 Comm'r's Mem. Supp. Summ. J. 18.


18

First, Minnesota law does not limit the term "gross receipts." Instead, it limits the broader

term, "average annual gross receipts." See Minn. Stat. § 290.068, subd. 2(c) ("except that the

average annual gross receipts must be calculated using Minnesota sales or receipts"). There is no

inconsistent use of the term "gross receipts" because that term is not used in isolation. Second,

the Commissioner attempts to manufacture inconsistency by blending terms. Federal law used the

four-word term "average annual gross receipts" and the three-word term "aggregate gross

receipts." Neither federal nor state law, however, used the Commissioner's four-word coinage

"average aggregate gross receipts." Finally, the Commissioner argues that "[t]he Minnesota

limitation on aggregate gross receipts is clear from the Minnesota-based limitations section

290.068 subdivisions 2(b) and 2( c) place on other definitions for purposes of the Minnesota R&D

Credit." 40 As indicated above, however, we conclude that precisely the opposite inference is

warranted. The Legislature's express modification of federal law in other respects indicates that

it did not intend to modify federal law in this respect.41

We also reject the Commissioner's contention that IBM's interpretation "would frustrate

the purpose of an incremental credit, which is intended to limit the credit to the increase in research

expenditures over a base amount determined solely by reference to Minnesota receipts." 42 First,

the argument simply assumes its own conclusion: that "aggregate gross receipts" include

Minnesota gross receipts only. Second, contrary to the Commissioner's contention, there is

4° Comm'r's Mem. Supp. Summ. J. 19.

41 The Commissioner correctly observes that federal law "use[d] the word 'aggregate' to refer to both the taxpayer's research expenses, and its gross receipts .... " Comm'r's Mem. Supp. Summ. J. 18. She then argues that "aggregate" should be consistently interpreted. Comm'r's Mem. Supp. Summ. J. 18-19. We do not disagree. The parties dispute, however, turns not on the meaning or application of the word "aggregate" but, instead, on the scope of what is to be aggregated (e.g., nationwide or only Minnesota gross receipts).

42 Comm'r's Mem. Supp. Summ. J. 20 (emphasis added).

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nothing "absurd" about using nationwide aggregate gross receipts in the denominator of the

fixed-base percentage.43 Doing so simply produces a different base amount than that sought by

the Commissioner, thereby altering the amount of qualifying research expenditures subject to the

credit.

This is really a policy argument disguised as statutory interpretation: "When calculating

the fixed-base percentage for the Minnesota R&D Credit, however, it only makes sense to take the

ratio of aggregate Minnesota research spending to aggregate Minnesota gross receipts, not

aggregate nationwide gross receipts." 44 We have no difficulty with the Commissioner's

suggestion that it would have "ma[ de] sense" for the Legislature to "reduce determination of the

Minnesota R&D Credit to a Minnesota-only frame of reference." 45 This is not what the text of

Minn. Stat. § 290.068 accomplished, however. Nor are we allowed to alter that text.

If the Legislature purposefully chose to use nationwide aggregate gross receipts in the

denominator of the fixed-base percentage, that is not a policy decision we are at liberty to modify.

See, e.g., Under the Rainbow Child Care Ctr., Inc. v. Cty. of Goodhue, 741 N.W.2d 880, 889

(Minn. 2007) ("The legislature and governor, not this court, should make the policy judgments

that determine the scope of tax exemptions."); Metro. Sports Facilities Comm 'n v. Cty. of

Hennepin, 478 N.W.2d 487,489 (Minn. 1991) ("Because taxation policy is peculiarly a legislative

function, involving political give-and-take and an awareness of local conditions, the courts are

very deferential in their review of tax legislation."). If the Legislature intended to use Minnesota

aggregate gross receipts, but neglected to include language in section 290.068 implementing this

43 Comm'r's Mem. Supp. Summ. J. 20-21, 23.

44 Comm'r's Mem. Supp. Summ. J. 23 (first emphasis added).


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intention, we are not free to supply the mistakenly omitted language. See, e.g., Green Giant Co.

v. Comm 'r of Revenue, 534 N.W.2d 710, 712 (Minn. 1995) ("We will not supply that which the

legislature purposefully omits or inadvertently overlooks.").

We note that in 2017 the Legislature amended Minn. Stat. § 290.068 to include a

Minnesota-specific limitation of"aggregate gross receipts." Subdivision 2(c) now reads: "'Base

amount' means base amount as defined in section 41(c) of the Internal Revenue Code, except that

the average annual gross receipts and aggregate gross receipts must be calculated using Minnesota

sales or receipts .... " Act of May 30, 2017, ch. 1, art. 13, § 10, 2017 Minn. Laws 1017, 1221 (1st

Sp. Sess.) (codified at Minn. Stat.§ 290.068, subd. 2(c) (Supp. 2017)). This amendment supports

our analysis in two important respects. First, by separately using the terms "average annual gross

receipts" and "aggregate gross receipts," the amendment verifies that the previous version of

subdivision 2(c) did not limit the two-word term "gross receipts" (as the Commissioner argues)

but, instead, limited only the four-word term "average annual gross receipts." Second, by now

expressly limiting "aggregate gross receipts" to "Minnesota sales or receipts," the amendment

underlines the previous absence of any textual basis for such a limitation.

We agree with IBM that, for the tax year in issue, Minnesota base amount had to be

"computed using federal gross receipts in the denominator" of the fixed-base percentage.46

Consequently, we grant IBM's motion for summary judgment on that issue.

C. Alternative Simplified Credit

The final issue is whether Minnesota law incorporated a federal prov1s1on allowing

taxpayers to choose an alternative method for calculating the Federal R&D Credit. Section 41 ( c ),

which contained the federal definition of "base amount," included as subsection (5) a provision

46 IBM's Mem. Supp. Summ. J. 7, 9-11.

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titled "Election of Alternative Simplified Credit." I.R.C. § 4l(c)(5). As previously discussed,

Minn. Stat. § 290.068 provided in part that "base amount" for state-law purposes "means base

amount as defined in section 4l(c) of the Internal Revenue Code." Minn. Stat. § 290.068 ,

subd. 2( c) ( emphasis added). According to IBM, if we conclude that the section 41 ( c) definition

of"base amount" incorporated into Minnesota law the minimum base amount limitation contained

in subsection ( c )(2), then, "[t]o be consistent, all ofl.R.C. § 41 ( c) would have to be so incorporated,

and that would include paragraph (c)(5)." 47 We disagree.

IBM' s argument is essentially this. If we reject its claim that I.R.C. § 4l(c)(l) alone

defined "base amount," then we must abandon any effort to discern which other subsections of

section 4l(c) were also part of the definition. We must either accept IBM's selective interpretation

of"to define," or conclude that the term furnishes no standard for decision. This claim is meritless.

Relying on the common and approved usage of the word "define," we concluded above

that I.R.C. § 4l(c)(l) through (c)(3) define the term "base amount" for purposes of federal law,

and that those provisions were therefore incorporated into Minnesota law. See supra§ IV.A. We

further concluded that none of the remaining subsections of section 41 ( c) defined base amount.

Id. Subsection ( c )( 5), titled "Election of Alternative Simplified Credit," perfectly illustrates why.

That provision provided in part:

(5) ELECTION OF ALTERNATIVE SIMPLIFIED CREDIT

(A) IN GENERAL. At the election of the taxpayer, the credit determined under subsection (a)(l) shall be equal to 14 percent (12 percent in the case of taxable years ending before January 1, 2009) of so much of the qualified research expenses for the taxable year as exceeds 50 percent of the average qualified research expenses for the 3 taxable years preceding the taxable year for which the credit is being determined.


22

I.R.C. § 41(c)(5). By its plain meaning, this provision pertained to "the credit determined under

subsection (a)(l)" rather than to the meaning of the term "base amount." Consequently, we hold

that the provisions of I.R.C. § 41(c)(5) were not incorporated into Minnesota law, and grant the

Commissioner's motion for summary judgment on that issue.

D. Stipulated Tax Consequences

In October 2013, the Commissioner determined that IBM was entitled to a 2011 Minnesota

R&D Credit of $313,195.48 The Commissioner determined that IBM' s Minnesota QREs for the

1984 through 1988 reference period were $838,379,120, and used that figure as the numerator of

the fixed-base percentage.49 For the denominator, the Commissioner used IBM' s Minnesota

(rather than nationwide) aggregate gross receipts for the 1984 through 1988 reference period, a

figure of$2,475,206,827. 50 The Commissioner thus calculated a fixed-base percentage of33.87%.

Applying the 16% statutory cap on fixed-base percentage contained in I.R.C. § 41(c)(3)(C),

however, the Commissioner used 16% as IBM' s Minnesota fixed-based percentage. 51

The Commissioner multiplied this fixed-base percentage by IBM' s average annual

Minnesota gross receipts for the four preceding years of $1,073,557,698,52 to compute a 2011

Minnesota base amount of $171,769,232.53 Having previously determined that IBM's 2011

Minnesota QREs were $178,297,050,54 the Commissioner derived a minimum base amount of

48 Stip. ,r,r 5-6; Ex. J-3, at 120.

49 Stip. ,r 13. The parties stipulate that this figure is correct. Stip. ,r 14.


51 Stip. ,r 17; Ex. J-3, at 122.


53 Stip. ,r 21.


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$89,148,525 (50% of $178,297,050). 55 Because the computed base amount of $171,769,232

exceeded the minimum base amount of $89,148,525, the Commissioner used the former figure as

IBM's 2011 Minnesota base amount. 56

To determine IBM's 2011 Minnesota R&D Credit, the Commissioner subtracted IBM' s

2011 Minnesota base amount ($171 ,769,232) from its 2011 Minnesota QREs ($178,297,050),

deriving a figure of$6,527,818.57 She allowed IBM a Minnesota R&D Credit equal to 10% of the

first $2,000,000 of that amount, and 2.5% of the balance, for a total Minnesota R&D Credit of

$313,195.58

The parties have stipulated that if IBM prevails on only the fixed-base percentage issue,

and not on the minimum base amount issue, as has occurred, IBM is entitled to an increased 2011

Minnesota R&D Credit.59 The increase occurs because the denominator of the fixed-base

percentage changes from Minnesota "aggregate gross receipts" for the 1984 through 1988

reference period ($2,475,206,827) to nationwide "aggregate gross receipts" for that period

($106,282,970,279).60 This produces a fixed-base percentage of 0.79%. 61 That lower fixed-base

percentage multiplied by IBM' s stipulated average annual Minnesota gross receipts for the

previous four years ($1,073 ,557,698) produces a base amount of$8,481, 106.62 Because this figure

55 Stip. iJ 21.

56 Stip. iJ 21.

57 Stip. iJ 22.

58 Stip. iJ 22; Ex. J-4.

59 Stip. iJ 33.

60 Stip. ,i,i 15-16, 26-27.

6 1 Stip. iJ 28.

62 Stip. iJ 28.

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is lower than IBM's minimum base amount of$89,148,525, the latter figure prevails (and replaces

the originally computed base amount of $171,769,232). Thus, the parties have further stipulated:

A subtraction of [this] Minnesota base amount ($89,148,525) from the Minnesota [2011] QREs ... ($178,297,050) equals $89,148,525. If IBM prevails only on the fixed base percentage issue, the Minnesota R&D Credit is equal to 10 percent of the first $2,000,000 of that amount, plus 2.5 percent of the balance of that amount, for a total Minnesota R&D Credit ... of$2,378,713. That amount does not include carryovers of the Minnesota R&D Credit.63

We agree with this stipulated computation, and order the Commissioner to compute any

carryovers.

As fully explained above, we grant in part and deny in part each party's motion for

summary judgment.

B.S.D.

63 Stip. ii 33.

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